EXIT STRATEGIES: Post-sale scenarios

It is possible to put yourself into the position of the prospective buyer and work out what is likely to happen to the business. If you can anticipate issues, problems or changes which the buyer will experience, can you reduce the impact of these and improve your attractiveness to the buyer?

By working through after sale scenarios, the firm can predict where problems might be encountered. As these are likely to cause problems in the negotiation, you may be able to fix these in advance or have solutions which the buyer can implement. By working through how these might be resolved, the firm can take the initiative and reduce potential negotiation problems.

Acquiring firms, especially those which have experience in M&A, assume they will have many issues to deal with after the acquisition. These are generally associated with the integration of the two firms as well as securing the best use of the assets or capabilities they acquire. In projecting the likely situation after the sale, consider the following questions:

• Where will the merged firm (yours) be located?
• What will happen to existing facilities, plants, warehouses, offices which are not required?
• Which positions are duplicated and therefore which staff will be made redundant?
• Which employees are key to the buyer’s benefits being realised? How are those staff to be retained?
• What will the new terms of conditions of employment be?
• What happens to employee options and any share purchase scheme?
• How will health insurance, vacation entitlements and existing bonus systems be translated?
• How is the buyer to leverage the new acquisition?
• What will happen to existing customers, suppliers and distributors?
• Which partnerships, alliances and joint ventures need to be terminated or protected?
• What are the owner/managers going to do in the merged company?
• What if they don’t want some, or all, of the senior management?
• What potential litigation will you have outstanding that will need to be resolved?

The key to a successful negotiation is to have thought through these questions in advance of any detailed discussion with the potential buyer. To the extent these issues can be resolved in advance or options can be presented, the negotiations will proceed more smoothly.

Generally speaking, it is easier to merge a firm which has standard conditions throughout its operations. So industry standard contracts with suppliers, customers, distributors and employees should normally not present a problem.

Overly generous terms of employment (salaries, benefits, bonuses, options, health cover, etc) can seriously damage a potential sale. Since the buyer will most often have to integrate new employees with their own, any marked differences where the new employees are better off, will be a serious impediment. It is always better to have a situation where employees gain through the merger rather than lose. Discretionary bonuses and rewards can be used prior to a sale to provide motivation without any guarantee that these will be continued in the future. Alternatively, terms of employment can be agreed where aspects can be subject to review on a periodic basis. These can then be removed prior to a sale or shortly after.

A firm intending to be sold should also look at the costs of terminating its various agreements. Since the situation after the sale cannot be predicted, having options in agreements which allow termination on change of control, or by putting a formulae or price on termination, allows the firm to estimate the costs of withdrawal. It also prevents a possible legal claim for damages.

The key question here is – how can you make this work for the buyer?

Put yourself in their shoes. What would the ideal scenario be for the buyer? How close can you get to that scenario? The closer you can get, the easier the negotiation will be. The buyer will be pleasantly surprised with the homework you have done and will see that you understand what they have to do to make the deal work. The fact you have resolved many of the problems, allows them to see you are flexible and will do what you can to resolve potential problems during the process of negotiation.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.